Ideas and discussions about economic and financial literacy issues.
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Friday, September 23, 2005

What is Economic Literacy?

There’s an interesting discussion on The Wall Street Journal Econoblog about economic literacy. Two bloggers (Russel Roberts at Café Hayek, and William Polley at William Polley) who I enjoy reading discussed the definition of economic literacy. They made a number of sound points, but two of them have long struck me as important to the discussion. One dealt with the difference between economic and financial literacy and the other with the development of economic theory.

As for the first point, I agree that many people seem to equate economic literacy with financial literacy. However, I would add that each compliments the other. I, too, have dealt with people who, upon hearing that I’m in economic education, immediately begin questioning me about the stock market. But I believe financial examples provide clear applications of economic concepts. They provide knowledge to help learn how to handle finances. And it can provide a big picture justification for handling finances well. Markets of all types are subject to the laws of supply and demand. Discussing a budget can be an exercise to help students understand opportunity cost and scarce resources.

As to the second point -- understanding the development of economic theory -- I think it too is given short shrift, or even misstated by people who do not understand it. The example of Adam Smith that was cited is excellent. People often summarize (incorrectly) Adam Smith by using a few points from The Wealth of Nations, without understanding the breadth and scope of that work. They then frequently ignore (intentionally or unintentionally) his other works, specifically The Theory of Moral Sentiments. Some say these works were written for two different audiences and then cite the “Adam Smith Problem”. But to read the works together is to get a truer understanding of Smith’s view of the world and vision for mankind.

After reading both works, one sees that Smith envisioned that, in an ideal world, the person acting in the economy would be "moral." While he understood many individuals weren’t, the pressures of society could encourage conformity to the rules. And these rules may be the foundation for the economic institutions. I’ve always understood economic institutions to include the rules and frameworks (formal and informal) that a society/economy constructs to guide decision-making. Thus by providing a "moral" structure to the rules, individuals are encouraged to make choices that are not only beneficial to themselves, but to their opposites in transactions of all kinds.

Smith's definition of morality was a product of his environment and background. That may be another issue for discussion as well as another reason to study the development of economic theory. For theory is developed to address problems and the issues of a time. You could argue that one needs to know the theory, the problem it addresses, and the context in which it was developed to decide a theory's continued relevance.

Posted by TSchilling at 4:37 PM | Comments (3)

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Posted by: Anonymous at October 3, 2005 6:43 PM

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Posted by: Logan Dickinson at October 31, 2005 11:02 AM

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Blog Archive Note

All entries prior to August 15, 2007 appeared on the economic education blog of the Federal Reserve Bank of Chicago. Entries between August 15, 2007 and July 31, 2009 were under the auspices of the Powell Center for Economic Literacy in Richmond, VA.